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Thoughts on Davos and Gold

By Savneet Singh and Dan Tapiero January 25, 2012 Co-founders of Gold Bullion International

The most important issue in the world that will not get discussed at Davos is gold.

Its importance has never been as great as it is today, relative to the limited understanding of why it is important. The point of these comments is to place gold within the world economic, political and social context.

World leaders from all walks of life are gathering in Davos this week. It is important for them to realize that the current solutions that have been chosen to deal with the financial systems problems are easy, lazy solutions. The value of gold is rising because owners of capital realize that their capital is being debased by the world’s authorities.

Ultimately, gold is not just a commodity or a currency. It is an asset with links to power, wealth, political control, history, freedom, moral values and even the direction of culture.

We are currently in a period where the world’s monetary and fiscal authorities have chosen to debase their currencies, either by suppressing interest rates artificially (USA) or by actual policies forcing their currencies to weaken (Switzerland). The acknowledgement that debasement is a viable solution to problems that have grown over the past 30 years is now more or less acknowledged as the right and proper course of action. Each of the three main economic players on the stage (the US, Europe and China) currently maintain negative real interest rates and perform some sort of asset purchasing, asset support programs. Free market principles and the discipline that they bring with them are now gone from the scene. Answers to current economic problems, which themselves were brought on by excess and leverage, are now being solved with added leverage, tinkering and ultimately debasement.

The problem today is not that the dollar has fiat status “and can be printed up” as so many suggest. The problem is that the total corps of world economic and financial “leaders,” who get together in remote ski villages, all believe in the same debasement programs. The “everyone is doing it so it must be ok” mentality, in others words “herd think,” has prevented real thought from occurring and killed what might be innovative policy responses to the current problems. Remarkably, even the ECB, the last holdout of the important central banks, in a gesture that is surely the most important in its 12 years of existence, has finally succumbed to the world’s pressure to monetize fiscal deficits. The killing off of the last of the hard money policymakers (Axel Weber and co.) has almost guaranteed that systematic debasement will occur at an increasing rate and will lead to the continued erosion of savers’ capital.

Why is this erosion a bad thing? In the long run it encourages a certain type of morality that is inimical to the values upon which America was founded and upon which almost every great fortune was ever built. Hard work, determination, foresight, savvy, and skill are all characteristics of the owners of capital. That is not to say that poor or unsuccessful people do not have such virtues, just that “owners of capital” almost always have them.

Debasement of currency –in essence the slow erosion of the value of capital — encourages one to think that saving, and in effect, hard work, in the creation of a lasting endeavor is not something that the culture places value upon. In fact, in a country where governmental social giveaways are popular, debasement encourages bad habits such as laziness and irresponsibility. What is the point of working hard when the government will ultimately support you? And — even if you did work hard — it wouldn’t matter because the actual money that you would eventually make would be losing its value by 2% a year in real terms (or 4% a year if you lived in the UK.)

Bad personal habits are an unfortunate outgrowth of bad economic policy that usually go unrecognized. However, currency debasement also corrupts the leaders who support such policies. The idea that one can print one’s own currency and then use that currency in the way that one likes is too much of a temptation for anyone. Behind such action ultimately lies the need for certain individuals to control the fate and well being of the rest.

The current leadership in the United States clearly espouses a sort of debasement of savers’ capital called “reallocation.” As Barack Obama stated in his State of the Union address, it is only fair that an owner of capital share with his less fortunate brethren. However, if he does not want to share he will get debased by the monetary authorities anyhow. The idea, unfortunately propagated by Warren Buffet, that the rich don’t pay enough taxes, is part of the “theme” or “trend” of our time.

This political form of currency debasement eventually leads to socialism and is the road to serfdom. The combination of these two forms of debasement — economic and political — occurring at the same time is usually a harbinger of bad things to come. However, few people in leadership circles seem to be concerned that the current path the world has taken to extricate itself from the crisis of 2008 (and really from the 30- year long debt buildup that ended in 2008) could be the wrong one.

Gold, of course, is not the answer to all of these problems. It does, however, have a valuable role to play in limiting the degree of world currency debasement while at the same time placing a check on political leaders who would want to spend money that isn’t theirs on whichever programs they like.

Gold should stand as an alternative to the world’s currencies. It is the only one that cannot be debased, devalued, defaulted upon or over taxed and easily confiscated. Unlike almost any other large forms of cash, it can be held outside the banking system and the purview of the federal authorities.

While the accumulation of gold is hardly a creative or important life endeavor, it stands against the manipulation of central authorities, central banks or central governments. In recent years, odd as it may seem, one of the largest groups of gold buyers has been the central banks of the emerging world. Somehow, these countries, aware of the debasement programs of the US and Europe (and to some degree China as well) are eager to protect the savings they have accumulated, held in dollars and euros, over the past ten years.

It might be going too far to say that these central banks and their sovereign entities are repudiating, in a quiet way, the values propagated by reckless spending and currency debasement. However, as time goes on, and as they allocate more of their savings to gold and hard assets, they will see real wealth increases that are the benefit of their hard work, skill and determination.